David Jones
’s chief executive
Paul Zahra
is standing by the retailer’s ­strategy to restore profit margins rather than chase sales through discounting, even though quarterly sales fell to their lowest level for at least six years after a warm start to winter.

The upmarket retailer sold more swimsuits than overcoats and more cooling devices than heaters in the quarter, while sales in the core womenswear category fell for the first time in years as middle-income customers shopped at cheaper rivals.

Mr Zahra conceded the retailer had sacrificed sales growth by cutting back on discounting, cancelling five promotional events and reducing the duration of its mid-season sale.

AFR
AFR

The single biggest impact on sales, however, was David Jones’s decision to exit low-margin categories such as DVDs and music, which have been plagued by double-digit deflation.

Analysts, who had been expecting same-store sales to dip 1.5 per cent, say David Jones appears to be faring worse than its mid-market rival
Myer
, which last week reported a 0.4 per cent increase in same-store sales, the fourth quarterly rise in a row.

They have questioned whether David Jones’s strategy of improving profitability by boosting gross margins will be sufficient to offset falling sales and higher costs for wages and rent.

But Mr Zahra appears confident the strategy will enable David Jones to ride out another slump in consumer sentiment and growing uncertainty ahead of the federal election.

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Gross margins expected to rise this year

“This is the same strategy we employed from last season and that’s what we saw – a decline in sales and an increase in gross profit dollars and margins," he said.

David Jones’s focus on margins rather than growth at any cost has the support of shareholder Allan Gray.

“I think it’s appropriate in all situations, not just this, that management seek to maximise their profitability in a sustainable fashion," said
Allan Gray
portfolio manager
Simon Mawhinney
.

“If that means reducing sales and increasing your gross margins, as an investor I don’t think we’d be parti­cularly concerned with that, in fact I think it’s a good outcome as long as it’s sustainable," he said.

However, he questioned whether gross margin gains would offset weaker sales this year.

“A 3.4 per cent fall in same-store sales is reasonably significant so you’d need quite a large gross margin expansion to offset that and I’m not sure that’s going to be possible," he said.

Mr Zahra said the retailer would attract customers through new and exclusive brands, store card rewards and better customer service rather participating in aggressive industry-wide discounting.

“The quickest and easiest way to drive sales is to discount but it impacts on profitability and it’s not sustainable," Mr Zahra said.

“We made a deliberate decision to focus on areas we can control – gross profit margins, inventories and costs."

Chinese credit card in store

Later this week, David Jones will start accepting the Chinese national credit and debit card UnionPay, improving its ability to attract big-spending Chinese tourists.

Mr Zahra said that despite the warm start to the season, David Jones’s winter inventory was lower than last year and it had no need to slash prices to clear stocks.

He said June sales would need to be competitive but the company would maintain its strategy.

“Clearance goes over four weeks so we can moderate and alternate our offers according to what’s happening in the marketplace.

“Our discounting preference is not to be as deep but it will depend on what other retailers do."

The retailer has also reduced up-front orders and is staggering deliveries to reduce the pressure to discount.

“If, God forbid, we have a cold ­summer, we’ll be able to manage through that better than we have in the past," Mr Zahra said.

Sales in core categories such as Australian designer, contemporary fashion and luxury goods rose more than 10 per cent and menswear, childrenswear and beauty remained positive in the April quarter. But sales fell in womenswear and homewares and both the value of the average purchase, and the number of transactions, fell.

Citigroup analyst Craig Woolford said the result demonstrated the ­difficult retail backdrop and warned that profit forecasts could be downgraded slightly.

Analysts expect net profit for the year ending July to rise from $101 million to $102.4 million.

Online sales soared more than 576 per cent in the quarter following the launch of new web, ipad and mobile shopping platforms last November.
Citigroup
estimated the online sales boost could have added 1 per cent to like-for-like sales growth, implying that in-store like-for-like sales actually fell 4.4 per cent in the latest quarter.